Chapter 31

Question 1

Bankruptcy is an __________ process

Answer 1

Administrative

Question 2

What are the 2 goals of bankruptcy law?

Answer 2

1. Protect a debtor by giving him a fresh start free from creditors’ claims, and
2. Ensure equitable treatment to creditors who are competing for a debtor’s assets.

Question 3

Bankruptcy Proceedings

Answer 3

Federal Bankruptcy Courts have exclusive subject matter jurisdiction over bankruptcy matters. Decisions of the bankruptcy courts can be appealed to the U.S. District Courts

Question 4

Role of the Bankruptcy Courts

Answer 4

essentially an administrative court who conducts proceedings dealing with the procedures required to administer the estate of the debtor.

Question 5

A bankruptcy court can conduct a jury trial if…

Answer 5

the appropriate district court and the parties involved give consent.

Question 6

Types of Bankruptcy Relief

Answer 6

Chapter 7 – Liquidation credit card debt
Chapter 11 – Reorganizations
Chapter 12 – family farmers/fishermen
Chapter 13 – adjustment of debts for individuals with regular income

Question 7

Consumer-Debtor

Answer 7

Debtor whose debts result primarily from the purchase of goods for personal, family, or household use

Question 8

Special Treatment of Consumer Debtors

Answer 8

certain information must be given to the consumer-debtor. Clerk of the court must provide info on the purpose, benefits, and costs of each type of bankruptcy and info on credit counseling services.

Question 9

Liquidation Proceedings - Chapter 7

Answer 9

most common and familiar type of bankruptcy – debtor turns over all assets to a trustee, who sells the nonexempt assets and distributes the proceeds to the creditors. All remaining debts, subject to certain exceptions, are then discharged.

Question 10

Who can file Chapter 7 bankruptcy?

Answer 10

Anyone
(individuals, partnerships, or corporations) But, businesses are often more interested in Chapter 11 so they can stay in business.

Question 11

How is chapter 7 bankruptcy started?

Answer 11

With a petition in bankruptcy

Question 12

Voluntary Bankruptcy

Answer 12

• Debtor files the petition
• Debtor must certify that he has received info on credit counseling
• Debtor must confirm the contents of the petition and state he understands the relief available to him and opts to proceed with liquidation

Question 13

Chapter 7 Schedules

Answer 13

1. 8 schedules required with the voluntary petition
2. To conceal assets or knowingly supply false info on these schedules is a crime
3. All schedules must be filed within 45 days of the petition

Question 14

What are the 8 chapter 7 schedules?

Answer 14

1. A list of both secured and unsecured creditors, their addresses, and the amount of debt owed to each.
2. A statement of the financial affairs of the debtor.
3. A list of all property owned by the debtor, including property that the debtor claims is exempt.
4. A list of current income and expenses.
5. A certificate of credit counseling.
6. Proof of payments received from employers within sixty days prior to the filing of the petition.
7. A statement of the amount of monthly income, itemized to show how the amount is calculated.
8. A copy of the debtor’s federal income tax return for the most recent year ending immediately before the filing of the petition.

Question 15

Substantial Abuse

Answer 15

Debtor is subject to “means testing” – court looks at the debtor’s income to determine whether a debtor’s petition is a “substantial abuse” of the bankruptcy code.

Question 16

Means Test basic formula

Answer 16

debtor’s average monthly income in recent months is compared with the median income in the geographic area in which the person lives.

Question 17

If they fail means test, they cannot do chapter 7…

Answer 17

but they can still file bankruptcy, they just can’t do liquidation

Question 18

What are expenses that are not considered necessity?

Answer 18

cell phone, cable, and internet

Question 19

Bankruptcy court will consider extenuating circumstances like…

Answer 19

child has cancer - there are massive medical bills

Question 20

If below median…
If above median…

Answer 20

…move forward
…“abuse” and petition is dismissed

Question 21

John and Sarah Buoy filed for Chapter 7 bankruptcy. For the past three months, John’s gross monthly income had been $4,900, and Sarah’s had been $6,761. They had five children. They owed secured debts of $34,321 on a Subaru Impreza and a BMW 328i, on which they intended to continue making loan payments (this is called reaffirmation, as will be discussed later). They owed $123,000 on a mortgage and $19,000 in student loans, and their unsecured debts were $4,900.
An auditor for the U.S. Trustee Program reviewed the Buoys’ Chapter 7 schedule and concluded that the family’s gross income figures were understated. Because of a mistake in the math, the Buoys had miscalculated their income by approximately $800 a month (or nearly $650 after taxes). The debtors claimed that they had incurred additional expenses after filing the petition, including orthodontic braces and another car. Even with those expenses, however, the court found that they would have an additional $400 a month in future disposable income and would receive sizeable tax refunds.

Answer 21

The court concluded that the Buoys could afford to pay their debts and dismissed the Chapter 7 petition for substantial abuse.

Question 22

Disposable Income

Answer 22

Subtract living expenses and secured debt payments (mortgage) from monthly income

Question 23

Living expenses

Answer 23

Modest allocations for food, clothing, housing, utilities, transportation (car payment), health care, and other necessities

Question 24

Additional Grounds for Dismissal:

Answer 24

1. Debtor conviced of a violent crime/drug-trafficking
2. Debtor fails to pay postpetition domestic-support obligations
   If either of these 2 events occurred…the court may dismiss the debtor’s petition

Question 25

Order for Relief

Answer 25

A court’s grant of assistance to a complainant. In bankruptcy proceedings, the order relieves the debtor of the immediate obligation to pay the debts listed in the bankruptcy petition. Given if the petition is found to be proper.

Question 26

Involuntary Bankruptcy

Answer 26

The debtor’s creditors force them into bankruptcy

Question 27

What are the requirements of an involuntary bankruptcy?

Answer 27

1. If the debtor has 12 or more creditors, 3 or more of the creditors having unsecured claims totaling at least $16,750 must join in the petition.
2. If the debtor has less than 12 creditors, one or more of the creditors having a claim of $16,750 may file.

Question 28

Debtor challenges the involuntary petition…

Answer 28

1. Court will hold a hearing
2. Court will only order relief if debtor is generally not paying debts as they become due

Question 29

If the debtor challenges the involuntary petition, a hearing will be held, and the bankruptcy court will enter an order for relief if it finds either of the following:

Answer 29

1. The debtor is not paying debts as they come due.
2. A general receiver, assignee, or custodian took possession of, or was appointed to take charge of, substantially all of the debtor’s property within 120 days before the filing of the petition.

Question 30

If the court grants an order for relief, the debtor will be required to supply…

Answer 30

the same information in the bankruptcy schedules as in a voluntary bankruptcy.

Question 31

How many days do you have to file schedules?

Answer 31

45 days

Question 32

Should an involuntary petition be used as an everyday debt-collection device?

Answer 32

No. There are penalties for frivolous petitions agains debtors

Question 33

Automatic Stay

Answer 33

a suspension of virtually all actions by creditors against the debtor or debtor’s property. The automatic stay normally goes into effect the moment the petition is filed. STOP (holding pattern, not dismissal)

Question 34

Creditors who knowingly violate the stay can…

Answer 34

be sued by any injured party, including the debtor, who can recover from the creditor, actual damages, costs, and attorneys’ fees, and may even be awarded punitive damages.

Question 35

What are the 4 exceptions to automatic stay (4 proceedings that aren’t halted)?

Answer 35

1. Domestic-Support Obligations
2. Proceedigns against the debtor related to divorce, child custody or visitation or domestic violence and support enforcement
3. Investigations by a securities regulatory agency
4. Certain statutory liens for property taxes

Question 36

Bad Faith

Answer 36

debtor has 2 or more bankruptcy petitions dismissed during the prior year – automatic stay doesn’t happen until the court exams the debtor’s good faith in this proceeding

Question 37

Bankruptcy Estate

Answer 37

Basically everything the debtor owns subject to 9 exemptions, become a part of the estate

Question 38

The trustee

Answer 38

Collects the debtor’s available estate and reduce it to cash for distribution, preserving the interests of both the debtor and the unsecured creditors.

Question 39

Exemptions – The federal Bankruptcy Code exempt 9 types of property up to a specific dollar amount that changes every 3 years.

Answer 39

1. A portion of equity in the debtor’s home (the homestead exemption).
2. Motor vehicles, up to a certain value (usually just one vehicle).
3. Reasonably necessary clothing, household goods and furnishings, and household appliances (the aggregate value not to exceed a certain amount).
4. Jewelry, up to a certain value.
5. Tools of the debtor’s trade or profession, up to a certain value.
6. A portion of unpaid but earned wages.
7. Pensions.
8. Public benefits, including public assistance (welfare), Social Security, and unemployment compensation, accumulated in a bank account.
9. Damages awarded for personal injury up to a certain amount.

Question 40

States have the power to pass laws precluding (preventing) debtors from using federal bankruptcy exemptions. A majority of states have done this. So, in these states…

Answer 40

the debtor uses state exemptions

Question 41

In states without laws precluding the use of federal exemptions, the debtors…

Answer 41

have a choice of federal or state exemptions

Question 42

Homestead Exemption

Answer 42

Each state permits the debtor to retain the family home either in its entirety or up to a specific amount, free from the claims of creditors and trustees in bankruptcy. Texas!!

Question 43

New Bankruptcy Reform Act rule

Answer 43

If the debtor acquired the homestead within 3½ years prior to the date of filing, the maximum equity exempted is $170,350, even if the state law would exempt a higher amount.

Stops people who are, in anticipation of bankruptcy, going and buying a multimillion-dollar house right before filing a petition for bankruptcy.

Question 44

Under the New Bankruptcy Reform Act a debtor must have lived in the state for ___ years prior to filing bankruptcy to be able to use the state homestead exemption.

Answer 44

2

Question 45

Creditors’ Meeting and Claims

Answer 45

within a reasonable time after the order of relief is granted (not less than 20 days or more than 40 days), the Trustee must call a meeting of the creditors listed in the schedules.

Question 46

How is property distributed in most voluntary bankruptcies?

Answer 46

Paid IN TOTAL to each
1. Secured Creditors
2. Unsecured Creditors
Domestic-Support Obligations
Administrative Expenses
Ordinary BUsiness Expenses
Wages and Salaries
Employee Benefit Plans
Certain Farmers and Fisherman
Consumer Deposits
Taxes and Fines
Claims Resulting from Driving while Intoxicated
General Creditors
3. Debtor

Question 47

Once debtor’s assets have been distributed to creditors as permitted by the Code, all remaining debts are…

Answer 47

discharged; judgments on debts are voided; creditors are enjoined from bringing any collection actions.

Question 48

Exceptions to Discharge

Answer 48

Student loans are not discharged unless payment of the loans imposes an undue hardship on us our our dependents
Federal taxes and domestic-support are not discharged

Question 49

In certain circumstances, the court may deny the discharge of the debtor and debtor remains liable to creditors for the unpaid portion of all claims, even after all assets have been liquidated and paid to creditors…

Answer 49

1. debtor concealed or destroyed property with the intent to hinder, delay or defraud a creditor;
2. debtor fraudulently concealed or destroyed financial records;
3. debtor had been discharged in bankruptcy within 8 years of the filing of the petition;
4. debtor fails to complete the required consumer education course; or
5. if the debtor is involved in any proceeding where the debtor could be found guilty of a felony.

Question 50

Revocation of Discharge

Answer 50

If the debtor acted fraudulently or dishonestly during the bankruptcy proceedings, the court has the power to revoke the discharge decree. The revocation power of the court is for 1 year and any creditor or the trustee can petition the court for the revocation.

Question 51

Reaffirmation of Debt

Answer 51

Debtor may wish to pay a debt – like to a family member, doctor or bank, and thus may enter into a reaffirmation agreement with that creditor, even though the debt would ordinarily be discharged. If you reaffirm the debt, you get to keep the asset (cars make a lot of sense to reaffirm).

Question 52

Chapter 11 reorganizations are most commonly used by corporate debtors, but cannot be used by…

Answer 52

Stock and commodities brokers

Question 53

Chapter 11 Reorganization

Answer 53

The debtor and creditors formulate a plan under which the debtor pays a portion of the debts and is discharged of the remainder.
The same rules apply to the filing of the petition for reorganization proceedings, as apply with liquidation proceedings.

Question 54

“Fast-track procedures for small-business debtors (liabilities not exceeding $2.7mil and do not own or manage real estate)

Answer 54

Chapter 11 Reorganization
Avoid the appointment of creditors’ committee
Shortens filing periods, simpler and costs less

Question 55

Voluntary/Involuntary filing

Answer 55

automatic stay and exceptions such as substantial abuse and adequate protection doctrine still apply in Chapter 11 bankruptcies.

Question 56

Workouts

Answer 56

out of court, speedy settlement of debts; often called negotiated adjustment of debts – private, faster, more flexible and cost less

Question 57

Must Be in the Best Interests of the Creditors

Answer 57

the court decides after a hearing if Chapter 11 is in the best interests of the creditors.

Question 58

Court can dismiss Ch. 11 cases after notice and hearing if they don’t see…

Answer 58

rehabilitation is possible, or if there is an inability to design a plan or if debtors use unreasonable delay tactics harming best interests of creditors

Question 59

Is the debtor allows to continue doing business during the reorganization?

Answer 59

Yes

Question 60

Creditors’ Committees

Answer 60

Made up of unsecured creditors

Question 61

When are creditors’ committees not necessary?

Answer 61

1. If a debtor in possession came up with a plan accepted by creditors no meeting is necessary
2. Fast-track chapter 11 proceedings

Question 62

Reorganization Plan

Answer 62

generally created by the creditors committee and the debtor and the Receiver; the purpose is to conserve and administer the debtor’s assets in the hope the debtor will be able to return to successful operation and solvency.

Question 63

Debtor may file a reorganization plan within the first _____ days after the date of the order of relief (extension up to 18 months from date of the order of relief);

Answer 63

120

Question 64

If debtor does not meet the 120 day deadline or get an extension, and fails to get the required creditor consent with 180 days…

Answer 64

any party may propose a plan up to 20 months from the date of the order for relief

Question 65

What must a reorganization plan do?

Answer 65

1. designate classes of claims and interests;
2. specify the treatment to be afforded the classes – same treatment must be given to all claims within a class;
3. provide an adequate means for execution;
4. provide for payment of taxes over a 5-year period.

Question 66

Acceptance and Confirmation of the Plan

Answer 66

1. the plan is submitted to each class of creditors for acceptance;
2. acceptance is by majority vote of the creditors, representing 2/3rds of the amount of the total claim;
3. court can refuse to confirm even if all classes of creditors accept the plan;
4. former spouse or child of debtor can block the plan if it doesn’t provide for the payment his/her claim in cash;
5. even if only 1 class of creditors accepts the plan, the court may still confirm by using the cram-down provisions of the Code. This means the court confirms the plan over the objections of the other classes of creditors.

Question 67

The individual debtor must complete the reorganization plan before…

Answer 67

being discharged from remaining debts.